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Funding problems in the mortgage market

Dutch National Bank

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Abstract

Dutch households have the second-highest mortgage debt in the world(108% of GDP), but they also save a lot, mainly in the form of compulsory pension savings schemes. However, as Dutch pension funds predominantly invest abroad, banks rely largely on the international capital markets to fund their mortgage business. Until the outbreak of the financial crisis, this way hardly this was hardly a problem; now it is. As Dutch households borrow heavily to buy their homes and because house prices are currently falling, international investors see Dutch mortgages as increasingly risky. They are therefore less willing to make mortgage funding available to Dutch banks or charge a higher price for this. Dutch banks also have less access to foreign deposits. For this reason, Dutch banks are turning to domestic deposits as a more attractive source of funding. This explains why interest rates on savings accounts are higher in the Netherlands than in other countries. The more limited availability of stable market funding had also highlighted the refinancing risks for banks, which is prompting them to curtail their mortgage lending, usually by charging higher interest rates. This development is reinforced by rating agencies that are increasingly looking at the loan-to-deposit ratio when assessing the creditworthiness of banks. This also gives banks as extra incentive to attract a larger share of the scarce savings deposit base by offering relatively high interest rates. In addition, the introduction of the net stable funding ratio will encourage banks to limit the duration mismatch between assets and liabilities. Due to the more limited availability of stable market funding and the higher interest rates on saving accounts, mortgage lending rates are higher in the Netherlands than in most other countries in the euro area. As a result, Dutch homeowners have so far barely profited from the ECB's extremely loose monetary policy. An additional explanation for the relatively high mortgage rates is the diminished competition in the Dutch mortgage market, which has translated into wider gross margins. However, there are indications that this latter factor is of a temporary nature. Whilst the aforementioned poor funding conditions currently impede entry, it seems reasonable to presume that, notably, foreign financial institutions will return to the Netherlands when funding conditions normalise. Lured by high margins, Dutch insurers have lately stepped up their activities in the mortgage market. In addition, price competition will heat up again as soon as the European Commission lifts the temporary price leadership ban on banks that have received state aid. The ban for ING was already lifted at the end of 2012. As yet, the gradual adjustment to the new capital requirements under Basel III is not a convincing explanation for the relatively high mortgage rates, as the capital tied up by mortgage loans is relatively low.

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